How low can it go - US natural gas futures fall under $2/MMBtu

HOUSTON (ICIS)--Henry Hub natural gas futures prices ducked under $2.000/MMBtu for the first time in a decade on Wednesday, setting a fresh record low in a year awash with bottoming values.

The May 2012 front-month price settled at $1.984/MMBtu on Tuesday, falling by 4.7 cents from Monday.

Sub-$2.00/MMBtu natural gas prices come with little surprise this year given the surplus of gas in stockpiles, coupled with an unusually warm winter that sheared down demand.

The price movement is a sharp contrast to the record-high Henry Hub futures price reached at $13.694/MMBtu in July 2008, underscoring the volatility of the market.

The natural gas front-month last broke through the $2/MMBtu barrier in January 2002, when prices hit $1.91/MMBtu.

For the petrochemical industry, the rock-bottom natural gas prices in the US means Gulf Coast-based chemical producers can seize on cost advantages when the oil-to-gas price ratio is above 7:1, according to the American Chemistry Council (ACC).

In recent times, the oil-to-gas ratio has skyrocketed as high as 22:1.

On Tuesday, the May 2012 WTI oil-equivalent futures price of $17.469/MMBtu compares with an almost 9:1 basis with the May 2012 Henry Hub settlement of $2.031/MMBtu.

“For industrial consumers and long time investors, the optimal time to lock in low cost gas prices appears to be now,” according to a recent client note on the US gas market by investment bank BNP Paribas.

The front-month natural gas futures price has remained firmly under $3.00/MMBtu since 10 January.

Low natural gas prices are also attributed to the growth in unconventional gas production, which has not significantly slowed since autumn.

The total marketed production of natural gas rose by about 4.8bn cubic feet/day (bcf/day), or about 8% in 2011, considered the largest year-over-year volumetric increase in history, according to the US Energy Information Administration (EIA) short-term energy outlook for April.

This year, drilling numbers suggest that fewer rigs are counted in industry drilling surveys, but the EIA said that the declines in gas rig counts were likely the result of producers shifting from dry gas plays, while the liquids-rich wet gas basin production remained robust.

US oilfield services provider Baker Hughes’ 5 April rig count showed 11 fewer gas rigs than the previous week, for a total of 647 units. There were 889 gas-related rigs one year ago.

In addition, inventory levels have broken seasonally-high records, as working gas in storage totaled 2.48 trillion cubic feet (tcf), with a surplus about 56% higher than the same time ago.